In this article we take a look at how COVID-19 is impacting the financial services industry and its customers. We also discuss how financial service providers can best adapt to the new reality and meet the changing needs of customers.
The seismic events of recent weeks have upended our lives, turning bustling high streets into dystopian ghost towns overnight as strict social distancing policies kicked in. Whilst being an unavoidable exercise in preventing further spread of the virus, the effects of shutting down huge swathes of the economy have been devastating for both businesses and consumers. Shock waves have also reverberated around the financial industry, and as the dust settles we are beginning to get some idea of the consequences.
Delinquencies are inevitable
- The UK unemployment rate is expected to reach ten percent in the second quarter of 2020, and when people don’t get paid, neither do the bills. This translates to increased delinquency across loans, credit cards and mortgages.
- Whilst government relief schemes can provide life support for businesses (at least for those which succeed in accessing them), they cannot conjure up demand. As time passes, more businesses will face financial ruin.
The shift towards digital will be accelerated:
- In the coming months, fear of infection will mean day-to-day financial tasks will largely be conducted digitally, using laptops, tablets and smartphones
- Increased delinquency, interest rate cuts, declining payment revenues, payment holidays and moratoriums on bank charges all add up to steep declines in revenue for lenders. To retain profit margins, costs will need to be cut. Digital represents an obvious opportunity to achieve this.
Demand for credit will erode over time
- Whilst credit is providing necessary relief at present, this cannot continue forever. Analysis of the 2008/09 recession showed those affected by job loss, repossession and bankruptcy were slow to re-enter the credit marketplace. Furthermore, the strict lending standards implemented as a result of the downturn reduced the pool of eligible borrowers.
- Business owners whose companies have taken a severe hit or collapsed entirely during the pandemic may be reluctant to open up further lines of credit and risk sinking further into debt. In addition, present levels of consumer demand are hardly conducive to new business formation.
A COVID-19 roadmap
With lenders facing the possibility of decreased revenue both in the short and medium term, and with social distancing inevitable at least until a vaccine is produced, let us consider some reasonable steps which can be taken by financial service providers in order to successfully navigate the challenges posed by COVID-19.
- The first priority is to meet the immediate needs of customers, many of whom are struggling to cover basic living costs and keep businesses afloat. A combination of agility and sound analytical insights will be necessary in order to get the right products to the right people in a timely manner.
- With social interaction restricted for the foreseeable future, providers must embrace digital transformation. Technology such as automated credit applications and apps which can replace the advice traditionally dispensed in branches should be fast-tracked and made widely available. Longer term, consumer preferences might actually recalibrate such that a fully digital experience is preferred even after the pandemic has abated.
- Finally, the financial services industry has a key role to play in getting customers back on their feet once the pandemic subsides. Those who leaned more heavily on credit will require well-thought-out debt solutions which offer an achievable route back to financial health. Customers who lack the resolve to return to the credit marketplace after the impact of COVID-19 will need encouragement, and personalised experiences could rebuild confidence.
The financial world has undergone some dramatic changes over the past two months. Social distancing means that digital technology now has a primary role to play in helping financial service providers meet the basic needs of customers. FinTech collaboration, and the use of open banking technology in particular, represent vital resources which can help realise this transformation, and providers who are able to quickly scale up innovation are the most likely to thrive within the new financial landscape.
FriendlyScore is an analytical software house currently offering open banking-based solutions to financial service providers in order to help them meet the challenges of COVID-19. To find out more, visit www.friendlyscore.com.